I: GENERAL INTRODUCTION TO CORPORATE FINANCE

  Overview of Finance

    General Understandings of Finance

      - Finance is the science of funds management

      - Finance includes saving and lending money.

      - Finance can be used by individuals, by governments, by businesses and by a wide variety of organizations

      - Finance is one of the most important aspects of business management.

    The main techniques and sectors of the financial industry

     -  An entity can be either a lender or a borrower

        When their income is more than their expenditure, they lend the excess income.

        Vice versa, they can borrow or sell equity claims, decrease their expenses or increase their income.

     -  The lender can find the borrower via a financial intermediary such as a bank

        The lender receives interest

        The borrower pays a higher interest

        The financial intermediary pockets the difference.

     -  Banks

        aggregate the activities of many borrowers and lenders

        allow borrowers and lenders coordinate their activity by

          accepting deposits from lenders, on which it pays interest

          then lending these deposits to borrowers

        are compensators of money flows in space

    Personal Finance

      - is the application of the principles of finance to the monetary decisions of an individual or family unit

      - addresses how individuals or families obtain, budget, save, and spend monetary resources over time

     -  might include the components

        checking and saving accounts

        credit and consumer loans

        investments in the stock markets

        retirement plans

        social security benefits

        insurance policies

        income tax management

    -  can revolve around the listed questions

    -  Personal financial decisions may involve

        paying for education,

        financing durable goods,

        buying insurance,

        investing and saving for retirement.

        paying for a loan, or debt obligations

    Public Finance

     -  is a field of economics concerned with

        paying for collective or governmental activities

        the administration and design of those activities

   -   answers the questions of

        what the government or collective organizations should do

        how to pay for those activities

    -   Financial economics

        is the branch of economics

        studies the interaction of financial variables such as prices, interest rates and shares,

        concentrates on influences of real economic variables on financial ones

        studies

            valuation- determination of fair value of an asset

            Financial markets and instruments

            Financial institutions and regulations

     -  Financial Mathematics

        is a main branch of applied mathematics concerned with the financial markets

        is the study of financial data with the tools of mathematics, mainly statistics.

     -  Experimental Finance

        aims to

           establish different market settings and environments to observe experimentally

          provide a lens through which science can analyze

             agent's behavior

             the resulting characteristics of trading flows

             information diffusion and aggregation

             price setting mechanisms

             returns processes.

      -   Researchers can

          study to what extent existing financial economics theory makes valid predictions

          discover new principles on which such theory can be extended

      -  Research may proceed by

          conducting trading simulations or

          establishing and studying the behavior of people in artificial competitive market-like settings

     - Behavioral Finance

        studies how the psychology of investors or managers affects financial decisions and markets

    -   Intangible Asset Finance

        deals with intangible assets such as patents, trademarks, goodwill, reputation, etc.

    Corporate Finance

      deals with

        financial decisions businesses make

        the tools and analysis used to make these decisions.

        how to maximize corporate value while managing the firm's financial risks.

     -  Capital investment decisions

        are long-term choices of

            which projects receive investment;

            whether to finance that investment with equity or debt;

            when or whether to pay dividends to shareholders

        are long-term corporate finance decisions relating to fixed assets and capital structure.

        are based on several inter-related criteria

            to maximize the firm value by investing in projects which yield a positive NPV

            to be financed appropriately

            to maximize shareholder value

        comprise an investment decision, a financing decision, and a dividend decision

      - The Investment decision

        to allocate limited resources between competing projects in a process known as capital budgeting

        to estimate the value of each opportunity or project, which is a function of the size, timing, and predictability of future cash flows.

    -   The financing decision

        corporate investments must be financed appropriately

        Management must identify the relevant capital structure

          Debt financing

              results in a liability or obligation,

              entails cash flow implications independent of the project's degree of success

          Equity financing

              is less risky with respect to cash flow commitments

              results in a dilution of ownership, control and earnings

        Management must match the financing mix to the asset being financed as closely as possible

      - The Dividend decision

        Management must decide whether to issue dividends, and what amount;

        Management must decide on the form of the dividend distribution.

      - Working capital management

        concerns with decisions to working capital and short term financing

        These decisions involve managing the relationship between a firm's short-term assets and its short-term liabilities.

        aims at managing the current assets and the short-term financing

    Financial Risk Management

      focuses on risks that can be managed

      play an important role in cash management

  Business Organization

    Sole Proprietorships

      You are responsible for all the business's debts and other liabilities;

      You have unlimited liability.

    Partnerships

      You may pool money and expertise with friends or business associates.

      You have unlimited liability

      They include the large accounting, legal, and management consulting firms.

    Corporations

      is legally distinct form its owners.

      is based on articles of incorporation

      is considered as a resident of its state for many legal purposes

      is owned by its stockholders who can get to vote on important matters

      have limited liability

      Income received by corporation is taxed twice

  Who is the Financial Manager (F.M)?

    can be anyone responsible for a significant corporate investment or financing decision

    Chief Financial Officer

      is responsible for financing the enterprise

      acts as an intermediary between the financial system's institutions and markets, on the one hand, and the enterprise, on the other

      oversees both the treasurer's and the controller's

        will have general responsibilities beyond strictly financial issues.

      involves in financial policy making and corporate planning

    Treasurer

      looks after the firm's cash, 

      raises new capital,

      maintains relationship with banks and other investors.

    Controller

      prepares the financial statements,

      manages the firm's internal accounting,

      looks after its tax affairs

  The Role of F.Ms

    F.M's role

      F.M is to ensure that the company has a sufficient supply of capital

      F.M is at the crossroads of the real world and the world of finance

      a buyer of capital who seeks to minimize its cost

      a seller of financial securities who tries to maximize their value

    F.Ms stands between the firm's real assets and the financial markets

    traces how cash flows from investors to the firm and back to the investors again

    F.Ms faces two basic problems

      Capital Budgeting Decisions

        are central to the company's success or failure

        are important to both service and manufacturing firms.

        are concerned with today's investments which provide benefits in the future.

      The Financing Decision

        Capital structure decision

        Capital markets

  Understanding Financial Markets and Institutions

    Financial Markets

      Primary Market

         allows companies to raise money by selling new financial assets

      Secondary Market

        allows investors to trade stocks or bonds

    Financial Institutions

      A financial intermediary

        invests primarily in financial assets

        provides financing to businesses, individuals, other organizations and governments.

  Goals of Corporation

    Shareholders want Managers to maximize market value

    Ethnics and Management objectives

    Do Managers really maximize firm value?

      Compensation Plans

      The Board of Directors

      Takeovers

      Specialist Monitoring

  For Class Discussion

  Special Terms

  Main Topic